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Dollar subdued after weak retail sales

The Australian dollar had a subdued tone on Wednesday after surprisingly weak retail sales data prompted markets to slightly narrow the odds of further interest rate cuts.

The dollar initially climbed as far as $US1.5023 before easing back to $US1.0495 after data showed retail sales fell 0.1 per cent in November, confounding forecasts of a 0.3 per cent rise. It was buying $US1.0505 in late trade.

The weak reading caused swap markets to increase the probability of a quarter point cut to a record low of 2.75 per cent in February to around 40 per cent from 35 per cent.

"The risk is the RBA cuts earlier and deeper than our current cash rate forecast of one more cut in May," said Rob Henderson, chief economist at National Australia Bank.

The Reserve Bank of Australia (RBA) eased by 125 basis points last year to lessen a painful strong currency and stimulate a slowing economy, while inflation remains at bay.

Henderson said there was little sign the rate cuts so far were offsetting the negative impact of the high Australian dollar and a decline in the country's terms of trade.

The Aussie nudged down 0.1 per cent on the day with decent buying interest seen at $US1.0450. Resistance was found at $US1.0530 where traders cited stops.

Its downside, however, was limited by a spike in iron ore prices, which climbed a further 3 per cent to its highest in 15 months at $US158.50 a tonne.

The dollar regained momentum on the yen, with the Aussie adding half a yen to 91.72, getting closer to a four-year peak of 92.83 struck on Monday.

Australian government bond futures rose, with the three-year contract up 0.04 points at 97.220. The 10-year contract added 0.015 points to 96.615, leading to a bullish steepening of the yield curve.